U.S. Treasury Yields Drop on Dovish Fed

The Federal Reserve kept interest rates unchanged on Wednesday as widely expected. But it took just one word from a strikingly dovish Fed to extend Wednesday’s sharp stock rally and cause U.S. Treasury yields to drop further. That word was “patient.”

More specifically, the Fed’s statement after its two-day FOMC meeting included the words, “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

Fed Even More Dovish Than Expected

The statement was significantly more dovish than what the Fed has said in the past about raising rates. As a result, investors interpreted it as a sign that interest rates may be substantially slower to rise than previously expected. This was good news for the stock market, and prompted bond yields to drop as expected.

Fed Chair Jerome Powell also said in the subsequent press conference that the case for more rate hikes has “weakened.” He additionally stated that the Fed would “want to see a need for further rate hikes.” By this, he meant a significant rise in inflation. Overall, Wednesday’s statement and press conference were more dovish than the Fed has been for a long time.

10-Year Treasury Yield Resumes Downtrend

As stocks surged, the benchmark 10-year Treasury yield fell on Wednesday from a high around 2.735% down to a low of 2.673%. While this one-day drop in the yield was significant, it’s nothing new when put in the context of the past few months.

The Fed has certainly become progressively more dovish of late, giving off signals of more patience and slower interest rate increases on the horizon. And bond yields have responded by falling sharply since early November.

Yields rebounded abruptly in the first half of January from the New Year’s low around 2.541%. But they’ve been falling again for most of the past week. There was also a technical “death cross” in the 10-year Treasury yield in early January, as shown on the chart. This hints at a strong bearish environment for bond yields.

Where Do Yields Go From Here?

From the tone and content of the Fed’s statement and press conference on Wednesday, it looks like Fed dovishness may indeed be here to stay. If that’s indeed the case, Treasury yields could have significantly further to fall. And stocks could reap substantial benefits from the prospect of lower interest rates for longer.

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A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart